Senators push bill to scrap mortgage firms Fannie, Freddie

Margaret Chadbourn

5 Min Read

The headquarters of mortgage lender Fannie Mae is shown in Washington September 8, 2008. REUTERS/Jason Reed

WASHINGTON (Reuters) - A bipartisan group of senators on Tuesday introduced a bill to abolish Fannie Mae and Freddie Mac and replace them with a government reinsurer of mortgage securities that would backstop private capital in a crisis.

The U.S. government seized the mortgage finance firms in 2008 to rescue them from insolvency, spending a total of $187.5 billion to keep them afloat. Fannie Mae and Freddie Mac, which charge lenders a fee in return for guaranteeing principal and interest on mortgages, are now posting record profits.

Under the bill, which is being led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner, the two companies would be liquidated within five years. The legislation would provide for government reinsurance that would kick in only once private creditors had shouldered large losses.

“It lessens the footprint of the federal government in housing and winds down Fannie and Freddie,” Corker said at a news conference. “But at the same time it keeps the housing finance industry in a liquid state.”

The measure seeks to jumpstart the stalled debate over how to remake the U.S. mortgage finance system, whose flaws were exposed by the bursting of the housing bubble and subsequent deep financial crisis.

Corker said the leaders of the Senate Banking Committee “indicated a willingness” to move forward on the bill once they pass separate legislation on the Federal Housing Administration, which they hope to do prior to an August recess.

Analysts cautioned, however, that the legislation was simply a first step of an uphill climb in Congress. Any proposal that clears the Democrat-led Senate would have to win approval in the Republican-controlled House of Representatives, where some lawmakers want a fully private system.

A mortgage system overhaul, as a result, is likely to take years.

“Corker-Warner represents a milestone in the government’s response to the housing crisis as it is the first comprehensive, bipartisan measure to deal with Fannie, Freddie and mortgage finance,” Jaret Seiberg, a senior policy analyst at Guggenheim Securities, said in a research note.

He added, however, that there “is almost zero chance the bill introduced today will be adopted” as it is currently written.

The Obama administration said it welcomed the effort and would work with both the Senate and House to find a bipartisan way to move forward with a revamp of the current system.

“The president strongly supports comprehensive housing finance reform that would forever end Fannie Mae and Freddie Mac’s flawed business model that put the American taxpayers on the hook,” said White House spokeswoman Amy Brundage.

The two firms, which back nearly half of all new U.S. home loans, were chartered by Congress to expand mortgage finance but operated as private, profit-making companies. Given the central role they played in the financial system, the government felt compelled to bail them out when they ran into trouble.

To create a new model, the bill would require private entities to buy mortgages from lenders and issue them to investors as securities. Private equity would be required to absorb a 10 percent loss of the principal underlying those new mortgage-backed securities if the loans went bad.

A new guarantor, called the Federal Mortgage Insurance Corp., would replace Fannie Mae and Freddie Mac.

It would charge and collect fees designed to cover both its operating costs and to maintain a catastrophic fund. It would also continue existing efforts to build a common securitization platform to help smaller lenders issue securities.

The new bill would not provide much for Fannie Mae and Freddie Mac’s private stock holders. The improvement in their financial fortunes has led some investors to speculate that they could be re-established as private firms.

Under the terms of their bailout, the U.S. Treasury holds $188 billion in Fannie Mae and Freddie Mac senior preferred stock, and any profits beyond what the companies need to maintain a capital buffer are swept into the government’s coffers. The Treasury also holds warrants to acquire almost 80 percent of the companies’ outstanding common stock.

The legislation would require any proceeds from Fannie and Freddie’s liquidation to go first to the Treasury, as the holder of the companies’ senior preferred shares, then to preferred shareholders and, lastly, to common shareholders.